Hospitals have fresh evidence that their financial pain is not only real, but getting worse.
Credit-rating agencies spent the summer crunching 1999 financial results, and their figures show a dramatic decline in not-for-profit hospital profitability.
A report that was released this month by Fitch and Duff & Phelps showed a 63% drop in operating profits last year. The report is based on financial ratios of 140 acute-care hospitals rated by Fitch (See chart).
Upcoming reports from the two leading healthcare rating agencies, Moody's Investors Service and Standard & Poor's, will echo the finding that not-for-profit hospital profitability tumbled last year. Each of those agencies rates about 500 not-for-profit hospitals and health systems.
"It is now a trend of declining performance," declared Lisa Goldstein, a vice president in public finance at Moody's, citing 1999 as the second year in a row of financial deterioration across all rating categories.
This is in stark contrast to excerpts of a Goldman Sachs report that were circulated by Republican members of Congress that said for-profit hospitals' financial picture was brightening.
Moody's, which is slated to release its figures later this month, will show that 43% of its rated hospitals lost money on operations in 1999, compared with 32% in 1998.
Standard & Poor's expects to issue its figures in late September.
The reports are among the first snapshots of how hospitals fared in 1999. They also represent independent confirmation of what hospitals have been saying all along: that their financial conditions are deteriorating. Many state hospital associations have released their own surveys or pointed to state government figures that indicate a profitability decline in 1999 (March 27, p. 4).
Hospitals could seize on the data as they lobby for more money from Medicare and Medicaid.
"These reports add to the weight of evidence that suggests that hospitals are in a financial squeeze," said Carmela Coyle, senior vice president for policy at the American Hospital Association.
The rating-agency figures are restricted to less than a thousand of the nation's 6,000 hospitals, and they don't include for-profit facilities. However, their figures are consistent with other preliminary data on 1999 hospital profitability.
For example, preliminary Medicare cost report data released by the Medicare Payment Advisory Commission showed that 34.2% of hospitals lost money last year. In addition, a new federal survey of 1,200 hospitals, called the National Health Indicators Survey, showed that hospitals had aggregate total profits of 2.7% last year, compared with 3.9% in 1998 and 6% in 1997.
More comprehensive figures will be available from the AHA's survey of its 5,000 members, due to be released in the fall, and eventually from complete Medicare cost report data.
Yet, while hospitals have blamed the Balanced Budget Act of 1997 and other government cost controls for their woes, rating analysts said a variety of factors are actually to blame, including hospitals' own strategic blunders.
For example, Moody's found that the largest 50 hospitals in its sample were less profitable than the smallest 50. "We think that's a result of the largest 50 engaging in risky integration strategies," Goldstein said.
According to Fitch, not-for-profit hospitals' median operating profit dropped to 1% last year from 2.7% in 1998. All rating categories saw operating declines, but hospitals lower than BBB took the biggest plunge, losing 5.9% in 1999 compared with losing 1.2% in 1998.
Those declines have taken their toll on hospital ratings, which affect interest rates and other terms of hospital debt. As of July 17, Fitch this year had downgraded 12 hospitals representing $2.1 billion of debt and had upgraded none.
Hospitals sank by other measures of financial health as well. Fitch noted that liquidity, as measured by days' cash on hand and the ratio of cash to debt, did not improve in 1999 as it had in each of the five previous years. Days of accounts receivable increased for all rating categories in 1999 and reached historic highs, primarily because of slower payments and more claims denials by managed-care payers, according to Fitch.
One bright spot was less debt service, as hospitals took advantage of lower interest rates to refinance.
Fitch said it expects balance sheets to weaken further this year as hospitals continue to make strategic capital expenditures. It predicted that operating pressures will continue for up to three years as hospitals transition to prospective payment for Medicare outpatient services and invest in technology to comply with provisions of the Health Insurance Portability and Accountability Act of 1996.